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The Age of Airbnb: How Cities Adapt to the Sharing Economy

Monday, June 17 2013

Austin is one of a number of cities coming to grips with how to regulate the growing online market for short-term rentals through sites like Airbnb and HomeAway. While creating these regulations gives cities the opportunity to raise revenue through licensing, it also creates a Gordian knot of competing interests. Here's the path some cities are paving through the obstacles towards a new legal framework for the sharing economy.

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The Age of Airbnb: How Cities Adapt to the Sharing Economy

On a residential street in Austin, Texas, sometime in 2011, a woman noticed strangers coming in and out of a neighbor’s house.

She discovered the home listed on home rental website HomeAway, one of a number of sites, like Airbnb, that enable people to list houses and apartments for short-term rental.

There are obvious upsides to this arrangement. Travellers get a more authentic local experience than a chain hotel and renters get extra cash. But renters can run afoul of zoning, tenant and hotel regulations. Noisy guests and extra traffic in the neighborhood can irk neighbors. So there are downsides as well.

That Austin woman was one such unhappy neighbor, judging by the sign she put up in her yard — “HomeAway, go away” — and her subsequent appeal to the city for help.

Jerry Rusthoven, a staffer in Austin’s Planning Development and Review Office, was assigned to her case. The city’s housing code said a home could only be rented for “non-transient” purposes. But the code’s definition of “non-transient” was nonexistent.

“If the code doesn’t define it, then it’s up to me,” says Rusthoven. But in this case, bureaucratic decree wasn’t enough. The woman appealed to the Board of Adjustment, which said rentals had to be at least 10 days long to qualify as non-transient. This in turn caused a number of HomeAway renters to sue the city. Defenders and opponents of apartment-sharing took up arms in what would become a contentious effort to push short-term rental regulations through the City Council last summer.

“Before we decided whether they were legal or not, they were here,” says Rusthoven.

Austin is one of a number of cities coming to grips with how to regulate the growing online market for short-term rentals through sites like Airbnb and HomeAway. While creating these regulations gives cities the opportunity to raise revenue through licensing, it also creates a Gordian knot of competing interests. For renters, the ability to rent an apartment or home to strangers for a few days at a time provides a way to offset housing costs or even make a profit. For neighbors, such rentals can be a disturbance or even a hazard; for landlords, at best a violation of a lease and at worst a liability; for the traditional hotel industry, a disruptive threat; and less scrupulous landlords could even use new regulations to skirt existing ones on single-residence occupancy units.

Eskandi-Qajar says regulating short-term rentals can bring about “increased economic activity in areas where there might not have been economic activity if someone were to go to a major hotel chain.” In dense, expensive cities like San Francisco or New York, it can defray the high cost of rent or a mortgage.

Building regulations that work

But what do good regulations for short-term rentals look like? SELC recommends
cities create a policy separate of that for normal hotels, and provides a list of rules and guidelines to consider. Among the suggestions are registration fees, taxes, and a guarantee of certain information and amenities for guests (a host’s phone number, compliance with safety regulations, etc). To ease a city’s concerns about the overuse of short-term rentals, and the potential for them to reduce available housing stock or disturb neighborhoods, SELC recommends cities consider a cap on the annual income a renter can make from rentals fixed as a percentage of their rent. SELC also advocates limiting some combination of the duration of stays per unit or the number of nights they’re allowed to rent it out.

In cities without laws that directly address short-term rentals, renters continue to operate anyway — either illegally or in a legal grey area. New York City is the largest market for short-term rentals, and maybe the best example of this. In New York a 2011 law says rentals in residential properties under 30 days are illegal, unless the tenant is present while the rest of the apartment is being rented. Of course, enforcing this law requires someone to make complaint, something the thousands of illegal private renters currently advertising whole apartments in New York don’t seem much concerned with.

One renter in New York has been fined so far for violating the rules, and Airbnb has taken up his case, saying he was in compliance with the rules (the defense: he wasn’t home when the apartment was rented, but his roommate was).

The short-term rental industry knows that it lives and dies by the regulations that govern it city to city. In New York, a number of companies and two state congressmen have formed the Committee for Short Term Rental Reform to lobby for clearer regulations directly addressing short term rentals.

Nationally, the Short Term Rental Advocacy Center looks to form grassroots cadres of renters to push for local reform. According to Tim Doyle, who helps run the center from his perch at PR company Glover Park Group, the center has opened twenty chapters nationwide since it set up shop in February. They’re pushing regulations that focus on registering short-term rental properties in vacation towns like Blue Ridge, Georgia, or Lake Worth, Florida.

But those two towns, however tourism dependent, contain less than 40,000 people. Austin has 840,000, and rules that work in a town might not work in a city of that size.

Sharing and oversharing

The battle over short-term rentals leading residents to declare “HomeAway go away” was all the more contentious because HomeAway’s home is Austin, where it employs 700 people.

The regulations Austin passed last year cover single homes, but not apartments, and include a $235 registration, a brief safety inspection, and another fee of $50 to notify all neighbors within 100 feet of the rental. Those who live in their property most of the year, but use short term rentals for annual tourist infestations like South by Southwest and Austin City Limits, have no restrictions on how much they can rent out. But to placate neighborhood concerns, homes used solely as an investment or for short term rental can’t comprise more than 3 percent of any given census tract.

At least, that's the idea.

“Frankly, compliance has been not all that great.,” says Rusthoven. Still in its first year, Austin has so far registered 401 rentals and took in $94,235. But the City Auditor found around 1,500 available rentals in a survey performed the week before SXSW, the annual music and technology festival that turns Austin into the center of the world for a certain jetsetting digital class. Rusthoven thinks this number was inflated by pre-festival profiteers fishing for extra cash. He pegs the real number of active, committed short-term rentals as somewhat lower, around 600, but isn't sure.

Compliance is important not just to placate neighbors, but to fill city coffers.

“A hotel tax to a politician is considered to be free money,” says Rusthoven. The 15 percent tax in Austin is paid by non-residents, gets split between the city and the state, and goes to the visitors bureau to help the city promote itself.

To enforce the law, Austin hired three staffers to be in charge of registration and roam the Internet, sending letters to property owners they think might not be in compliance. So far, no one has ignored the letters or had to go to court over the new rules.

Other bustling rental markets are host to new regulatory schemes as well.

Southern California's Coachella Valley is home to a large vacation rental community and a well regulated short-term rental market. Much of this success is due to Cindy Gosselin, whose company Vacation Rental Compliance makes sure that renters are legally squared away under local law, which varies across in the five cities she covers: Cathedral City, Palm Desert, La Quinta, Indio, and Rancho Mirage. She guesses there are around 5,000 short-term rental units in the entire valley.

Gosselin is an accountant by trade, and started sleuthing out short term rental scofflaws after budget cuts forced her out of working for the city of Palm Springs. Ironically these same budget cuts propelled Coachella Valley cities to pursue illegal short-term rentals to compensate for lost revenue. Nearby Palm Desert brought her on to after the city passed new regulations last year, and she now provides a service that cities in the valley could not afford otherwise.

“The work would require approximately more than 50 percent of a staff member’s time that is already stretched thin with regular job duties,” says Paul Gibson, Palm Desert’s finance director.

Coming up on its first year with short term regulations in place, the City of Palm Desert registered some 600 properties, which earned the city $444,000 in revenue, according to Gibson. He estimates an 80 percent compliance rate, and that the number of rentals grows every month.

When Gosselin moves into a new city, her first step is a compliance education campaign for the rental community. Owners not in compliance then receive a note urging them to shape up. She says registration in the valley runs about $100 per property (it's just $25 in Palm Desert). Registration ensures cities can collect on transient taxes, and also makes sure the city has someone to contact in case there’s a problem on the property.

“Rarely does it get to fines,” says Gosselin.

Gosselin’s job is complicated by the mishmash of different regulations in the different cities where she works. Some require a business license others require a vacation rental license. She also has to keep up with the ever-changing online market. She says one site recently grew by 300 homes in four months.

“It’s something that has to continually be monitored,” she says.

She supplements her Internet scouring by maintaining contact with property management companies across the valley. They can help notify her when properties change hands, and enter or exit the market. Another key ingredient to her work is time.

“If you look at Palm Springs website on VRBO, most of the homes have the transient tax now,” she says, “it takes a couple years to get to that point.”

One city yet to get to that point is San Francisco, where regulations have long been in the works from the Board of Supervisors. City law holds that it’s illegal to rent out an apartment for less than 30 days in a building with four or more residential units. Legislation was passed last year to ensure that private individuals were to be held accountable for compliance just like businesses. But with complaint-driven enforcement, the city is missing out on raising funds.

Like Austin, San Francisco is home to a short term rental giant. Bay Area-based Airbnb signed a 10-year lease to stay in the city last year, and expects to employ more than 1,000 people. Yet some are critical of the company’s performance as a corporate citizen. A recent editorial in the San Francisco Bay Guardian makes the case that San Francisco Mayor Ed Lee has turned a blind eye to Airbnb’s refusal to enforce the city’s Transitory Occupancy Tax, costing the city $1.8 million a year.

Amy Chan, a legislative aide for David Chiu, the board of president of the board of supervisors, can't say much about the upcoming regulations. She says that they will verify that an apartment is rented by a “primary resident,” and place a limit on how much a specific apartment can be rented.

“Beyond that I can’t get into specifics yet,” says Chiu.

At the city level she’s been in contact with the Planning Department, the Building Inspection Department, and the City Treasurer’s office. On the public side she’s been in contact with tenant’s groups, neighborhood groups, property owners, and industry groups — including Airbnb.

“[That] doesn’t even count the individual calls we get about this,” says Chiu.

She expects a proposal regulation to be released in the next few weeks, but isn’t certain.

“It has been very complicated,” she says. “There are always new questions and issues that get raised.”